Price Wars

Price competition has long been part of the tobacco industry strategy. It was the major tool for the achievement of monopoly power in the 1880s and was a key element in the early twentieth-cen tury dominance of the market by Camel. In the 1930s, price competition, made possible by overly aggressive price increases by the majors, contributed to the emergence and growth of Brown & Williamson and Philip Morris (Sobel, 1978). From the end of World War II (1945) until 1980, however, price competition was virtually absent from the U.S. cigarette market.

In 1980, tiny Liggett & Myers, a firm that had become too small to enjoy oligopolistic profits, broke ranks with its fellows by introducing generic cigarettes. The strategy was made possible by the pattern of price increases in the industry— increases that had exceeded the rate of inflation for years. Brown & Williamson soon followed suit with its own generic brands, and within a few years every cigarette manufacturer had a multitiered pricing structure, with the heavily advertised, standard brands at the top. Prices for the major brands continued to rise steeply, far faster than inflation, through early 1993. Customers who might have stopped smoking because of high prices were kept in the market by the increasingly available lower priced offerings. By early 1993, however, investment analysts had become concerned because lower priced brands accounted for more than 25 percent of all cigarette purchases—with attendant threats to profits—and Philip Morris had become alarmed by the market share losses sustained by its cash cow, Marlboro, to less than 25 percent of all cigarettes sold.

Philip Morris had a number of key strengths that gave it a flexibility not possessed by its competitors, including market leadership, an absence of corporate debt, and a strong youth market for Marlboro. Its principal competitor, RJR/Nabisco, had an enormous corporate debt—and although Camel had been making inroads into Marlboro's youth market, it was still far from the dominant cigarette. These factors led Philip Morris to cut prices substantially (while mounting the most elaborate promotional campaign ever seen in the industry). The competition was forced to follow suit with lower prices. Marlboro's brand share surged; the threat to profitability from lower priced brands subsided; and the competition was left somewhat weakened.

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